In this context, models of vertical integration (e.g.,
Shaked and Sutton, 1982), applied to Internet retailers’ use
of PDS to enhance differentiation relative to competitors
selling identical products,would predict that retailers could
trade off product and S&H margins to influence demand.
Accordingly, we would expect to see the emergence of an
inverse relationship between product margins and S&H
margins for different approaches to the choices of PDS
performance promises in customers’ transactions with
retailers. That is, after controlling for differences in PDS
performance promises,wepredict that themargins Internet
retailers can obtain from S&H prices will be shaped by the
demand that retailers can attract from the margins they
receive fromproduct prices, and vice versa (Dinlersoz and Li,
2006). Thismeans, for instance, that if customers arewilling
to pay a premium for first-class PDS, a retailer can attract
those customers by charging higher S&H premiums to
justify this service, while remaining price-competitive by
compensating the customers with lower product margins.
This leads to our next proposition.